6 MIN READ
How Real Estate Depreciation Works for Investors
Depreciation lets property owners deduct the building's cost over time — 27.5 years for residential property — even while the property may be gaining market value.
For passive investors in syndications, depreciation flows through the partnership to your K-1, which is why apartment investments often show taxable losses in early years while paying cash distributions. This article explains the mechanics generically; your CPA applies them to you.
What is cost segregation?
Cost segregation is an engineering study that reclassifies parts of a building (fixtures, flooring, site improvements) into shorter depreciation lives of 5, 7, or 15 years instead of 27.5.
Shorter lives mean larger deductions sooner. On apartment deals, sponsors commonly commission a study in year one so limited partners receive accelerated depreciation early in the hold.
What is bonus depreciation?
Bonus depreciation lets investors deduct a large share of those short-life components immediately in the first year rather than spreading them out.
The allowed percentage has changed repeatedly under federal tax law, so the current-year rate is a question for your CPA — the mechanism, not the rate, is the point here.
What's the catch?
Depreciation defers tax rather than erasing it: when the property sells, prior deductions are 'recaptured' at a special rate, and passive-loss rules limit whose income the deductions can offset.
For most passive LPs, syndication losses offset passive income, not W-2 wages — a distinction that surprises many first-time investors. Real estate professional status changes this for some households; again, CPA territory.
Frequently asked questions
Can depreciation from a syndication offset my W-2 income?
Generally no — passive losses offset passive income unless you or your spouse qualify for real estate professional status under IRS rules.
Do I have to pay back depreciation when the property sells?
A portion is typically recaptured at sale and taxed at up to 25%, which is why depreciation is best understood as tax deferral, not tax elimination.